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How To Refinance FHA To Conventional Loan

May 08, 2024 7-minute read

Author: Victoria Araj

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Homeowners who refinance from a Federal Housing Administration (FHA) loan to a conventional home loan may reap financial benefits, like lowering their monthly payments and saving money.

But what’s the difference between the two loans, and is a refinance from an FHA loan to a conventional one the best option for you?

Can You Refinance An FHA Loan To A Conventional Loan?

Yes, homeowners with an FHA loan can refinance to a conventional one. In fact, refinancing from an FHA loan to a conventional loan may allow borrowers to shorten their loan term, take advantage of lower interest rates and enjoy lower monthly payments.

Why Should You Refinance From An FHA To A Conventional Loan?

The differences between FHA and conventional loans often make the FHA loan a better option for borrowers purchasing their first homes. FHA loans are backed by the government and may have more relaxed requirements (like lower credit score prerequisites) because they’re insured by the FHA.

However, many homeowners opt to refinance FHA to conventional once they have the loan. They may be able to get rid of their mortgage insurance premium (MIP) and lower their monthly payment or tap into their home equity to fund other expenses. If the markets have changed, you might qualify for a lower rate on your mortgage loan when you switch, too.

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How To Refinance Your FHA Loan To A Conventional Mortgage

Looking to refinance an FHA loan? The exact process can vary depending on the terms of your current loan and your mortgage lender.

Step 1. Research Rates And Prepare Documentation

Before you switch from an FHA loan to a conventional one, you'll need to do some research. Look at different lenders and compare their rates. Ask about their fees for refinancing.

You may also want to research different types of refinancing. A cash-out refinance, for example, will allow you to borrow from your equity by taking out more than what you owe on your current mortgage in cash. A rate-and-term refinance is focused more on adjusting your interest rate or loan term (or both) without borrowing additional funds.

Whatever the case may be, take the time to gather up important papers, like your pay stubs, tax forms and bank statements, to show the loan officer that you've been responsible with your existing loan.

Step 2. Meet Refinancing Requirements

Before you start thinking about refinancing from an FHA to a conventional mortgage, it's important to know what your lender might require.

It can vary depending on the lender and your personal situation, but in general, here’s what you need in order to refinance to a conventional mortgage based on Rocket Mortgage® requirements:

Step 3. Submit An Application And Go Through Underwriting

Once you've met the basic eligibility qualifications and submitted the necessary documentation, the next step is to go through the underwriting process. In the underwriting process, the loan officer will complete a thorough evaluation of your financial status and the property being refinanced.

In addition to the personal requirements (credit score, proof of income, etc.) listed above, a home appraisal is necessary to make sure your home’s value aligns with your refinancing goals. Your loan officer will likely also complete a title review to check for any issues that might delay the process.

You may also receive a Closing Disclosure, which outlines the final terms and costs of the mortgage refinance. This includes the loan amount, interest rate, closing costs and any other expenses.

Step 4. Finish The Closing Process

Last but not least, you'll complete the refi closing, just as you did when you took out your original mortgage loan. You will need to review and sign various loan documents and other pertinent paperwork related specifically to the new conventional loan.

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Pros Of Refinancing From An FHA To Conventional Loan

Refinancing from an FHA to a conventional loan has its financial benefits. Here’s how it can help you save.

Canceled Mortgage Insurance Premium (MIP)

When you get an FHA loan, you must pay an FHA MIP no matter how much money you put down.

There are two payments: an upfront MIP that you pay at closing and an annual payment that’s broken down and added to your monthly mortgage payment.

If your home loan was finalized on or after June 3, 2013, how long you pay the MIP will depend on the amount you put down.

  • If your down payment was at least 10%, you’ll pay the MIP for 11 years.
  • If your down payment was less than 10%, you’ll pay the MIP for the life of the loan.

Mortgage Insurance Premium Vs. Private Mortgage Insurance

With a conventional loan, you must also pay monthly mortgage insurance payments if your down payment is less than 20%. This is called private mortgage insurance (PMI).

But unlike with an FHA loan finalized on or after June 3, 2013, borrowers with a conventional mortgage can get rid of PMI when they have enough equity in the home. You can request that your servicer remove PMI once you have at least 20% equity based on the original payment schedule, or you can wait for it to automatically cancel once you meet the servicer’s equity requirement. That's typically around 22%.

If you have an FHA loan, you’ll likely need to pay MIP for 11 years – or until your loan term ends – regardless of your equity. But if you refinance FHA to conventional, you could potentially get rid of your MIP.

Lower Interest Rates

When you refinance your home loan, you get a new interest rate. While conventional loan interest rates are typically a bit higher than FHA rates, you could still get a lower interest rate and save money if current refinance rates are lower than when you first took out the loan. A lower interest rate could potentially save you thousands of dollars.

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Cons Of Refinancing From An FHA To Conventional Loan

While a mortgage refinance can affect your finances in a positive way, you should know that it also requires spending some money and time.

Closing Costs

While a refinance from FHA to conventional can save you money by allowing you to drop your insurance or get a lower interest rate, you’ll have to pay closing costs. On average, closing costs are about 2% – 6% of the loan balance. For example, if your loan balance is $200,000, you can expect your closing costs to be around $4,000 – $12,000.

Since there are costs associated with refinancing, you’ll want to ask yourself, "Is the cost to do so worth the savings?"

To be sure refinancing is worth it, calculate your break-even point. This is the point at which your refinance makes sense financially, saving you money rather than costing you more than you’ll save.

Repeat Loan Approval Process

Another way a refinance can cost you is in time.

You may already have a home loan, but you’ll need to go through the application and loan approval process all over again for your new loan. This includes having your credit pulled, submitting certain documents and potentially getting another home appraisal.

You'll likely need to additionally provide:

Alternatives To Refinancing Your FHA Loan To A Conventional Loan

If all of that seems like too much – or you’re unable to refinance to a conventional loan – an FHA Streamline Refinance could be a good alternative.

An FHA Streamline Refinance allows you to enjoy some of the benefits of refinancing without changing to a conventional loan. You may still be able to lower your interest rate and reduce your monthly payment. However, you won’t be able to get rid of mortgage insurance and you’ll still need to pay closing costs. It’s worth noting that mortgage insurance costs are lower on an FHA Streamline.

This type of refinancing also comes with another benefit: a speedier, more simplified process. It typically requires less documentation and may not require an appraisal.

While the lender may consider fewer credit factors with an FHA Streamline, a credit check is still required. If you don’t meet the minimum credit score requirements for refinancing to an FHA Streamline or a conventional mortgage, you may want to consider learning how to refinance with bad credit.

FAQs For Refinancing From An FHA To Conventional Loan

Do you still have questions about refinancing from an FHA to a conventional loan? Here are some answers to the most frequently asked questions surrounding this topic.

Can I refinance out of an FHA loan?

Yes, you can refinance out of an FHA loan as long as you qualify for a conventional loan with a credit score of 620 or higher and have 5% – 25% equity in your home. If you have 20% equity, you may also be able to remove your mortgage insurance and lower your monthly payment in the process.

When should I refinance my FHA loan to a conventional loan?

Refinancing to a conventional loan can be a good idea if your credit score has improved, interest rates are down or you plan to live in the house long enough to recoup your closing costs. Otherwise, you may not see some of the benefits discussed above.

The Bottom Line

Refinancing your FHA loan to a conventional loan can be done and has a few potential benefits, including dropping your mortgage insurance, lowering your interest rate and saving money.

While these perks can help you reach your financial goals, you’ll also need to consider the closing costs, so make sure it’s worth it in the long run.

Get a better look at your refinancing options and start your initial mortgage approval today with Rocket Mortgage.

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.